Towards an Understanding of CBDCs as a Societal Benefit

In my previous post Towards an Understanding of CBDCs as a Threat to Freedom and Privacy I discussed concerns that libertarians on the right side of politics have with Central Bank Digital Currencies (CBDCs). I pointed out that commentators like Mr. Rand Paul and the Cato Institute argue that CBDCs are risky as they perceive these types of digital currencies to be threats to freedom, privacy and financial security. In this regard decentralised cryptocurrencies are a safer bet in their view. I for my part, in my previous post pointed out that these kinds of threats and privacy concerns also make decentralised digital cryptocurrencies, like BITCOIN risky as well.   

Libertarians on the right wing of the political spectrum, as well as most of the mainstream media’s commentary on digital currencies view digital currency technology in terms of how it can benefit individual economic actors and support the capitalist financial system. In this post I will discuss how digital currencies and CBDCs are viewed from a socialist perspective which sees these technologies in terms of how they can, despite the risks, through the proper governance of decentralised technologies benefit the economy and society as a whole and not just financial capitalism.

An enthusiastic supporter of CBDCs on the Left is Yanis Varoufakis, Greek economist and politician. This exuberance is displayed in an interview entitled Technology and Redistribution of Power. The interview was aired by the Harvard Business Review on November 24, 2021, and hosted by Azeem Azhar. Mr. Varoufakis related how he, as Finance Minister of Greece came within a hair’s breadth of implementing, in Greece “…. a system of making payments….” based on the Euro that did not involve the European Central Bank (ECB) or the utilisation of Bitcoin.

Mr. Varoufakis related how this payment system, built on blockchain technology would, if it had been implemented be hosted by Greece’s Tax Office. Each citizen’s tax file number would have been the basis for an individual account on the Tax Office website. Into this account the Government would deposit a certain amount of money which could be used to purchase goods and services, not in the form of paper money but as a unit of exchange that could be transferred to a seller, for example a supermarket. Using a pin number to access the account the citizen as a buyer would be enabled to transfer the appropriate funds to the seller to complete a transaction.

Mr. Varoufakis, on the matter of the control of the money supply related how the influence of financial intermediaries such as commercial banks and wall street bankers distorts economic outcomes for a society. As an example, he cited the quantitative easing performed by the US Federal Reserve to stimulate the US economy during the 2008 financial crisis and the COVID-19 pandemic. In cases like this the Federal Reserve transferred money to organisations like JP Morgan and Bank of America anticipating that these bankers would lend it to big corporations which would in turn spend it on the creation of productive and fulfilling jobs and green energy projects.

However, this did not prove to be the case. The money was wasted. The corporations took the money and instead of investing it productively used it to buy back their own shares. This forced the prices of these shares to go up. As a reward the CEOs of these companies were also granted handsome bonuses and very little was done to improve the real economy by providing good jobs or funding renewable energy projects.

Mr. Varoufakis asks us to imagine how blockchain could be utilised to benefit every resident in the US or Eurozone by “properly democratizing money.” Each person would be granted an account and identification number residing on the central bank’s blockchain. When there is the need for economic stimulus all the residents would receive from the central bank credit points, denominated in the national currency towards “a basic income for everyone”.  

Writing an article entitled A Central Bank Cryptocurrency to Democratize Money, on July 28, 2021, in Project syndicate Mr. Varoufakis lays out in more detail his position arguing that a CBDC is a mechanism that could wrest the control of payments systems and monetary supply from “…. the hands of bankers,” and also thwarting “….  central banks’ efforts to boost business [which] end up amplifying inequality while failing to address either economic stagnation or the looming climate disaster.”

He discusses the ability of private bankers to create new money by lending to their customers, adding to the balance of borrower’s accounts. This money-making capacity is, “in theory” constrained by the ability of central banks to enforce minimal levels of real-estate collateral for each loan that is approved thus ensuring the “ratio of safe debts”. However, as history has shown a financial crisis can cause “debts [to] turn bad en masse.” This souring in turn forces central banks to make a stark choice: allow banks to falter or accept “…. increasingly worthless collateral.”

As mentioned above, events such as the 2008 financial crisis and the COVID-19 Pandemic have shown that central banks have poured money into the private banking system which in turn ends up in the hands of the “ultra-rich”. The rest of society “suffers stagnation and austerity”.  Within this context of entrapment, it is hard for central banks to stimulate economies while trying to restrain the monopoly bankers have over payment systems and the creation of money resulting from lending practices. From a socialist perspective the monopoly of private banks over the payment system and money creation needs to be broken.

Mr. Varoufakis argues that CBDCs should be based on Distributed Ledger Technology (DLTs) because such technologies provide a resilient and anonymous platform that is resistant to hacking and physical damage. CBDC DLTS would be more energy efficient in that there is no mining required because the central bank would set limits on the quantity of money in circulation. Also, such DLT based systems by offering transparency about the quantity of money in circulation cannot covertly bring about inflationary pressures.

Mr. Varoufakis was talking and writing about a CBDC system from a left leaning theoretical perspective. He was prevented from implementing his ideas, as Greece’s Finance Minister because of “…. coup d’etat against the people.”

There is an example of a digital currency that has been implemented by a socialist government. The People’s Republic of China (China) has a mixed economy embedded within a socialist framework. The Central bank of China is the state-owned People’s Bank of China (PBoC). This institution has operationalised a digital currency called e-CNY or digital Yuan. The Yuan is the principal unit of account of the Renminbi (RMB). The RMD is the official currency of China.

The Singapore Law Gazette’s Heng Wang provided, in November 2021 an informative analysis of e-CNY in terms of its role within the Chinese societal context entitled China Meets Digital Currency. He began his analysis by emphasising the unique nature of China’s CBDC project.

In one respect e-CNY is similar to other CBDC projects that are happening in other countries like the ability apply certain “monetary policy levers” for “highly targeted monetary interventions.” Fundamental things held in common with other CBDC implementations are things such as improving the way payment systems operate, boosting tax revenues by restricting tax evasion and facilitating flexible monetary policy via negative interest rates to stimulate economies.

According to Mr. Wang the Chinese government’s approach to e-CNY differs, from the CBDCs of other countries with respect to its underpinning social and economic priorities and negative perspective on private cryptocurrencies. I would describe these as socialist priorities and as such emphasise the regulation and central control of the monetary tools that would drive all of the payment systems as well as the inflows and outflows of the RMB as the official currency of China.

I have already indicated that those on the right of the political spectrum praise private decentralised cryptocurrencies as vehicles supporting individual liberty. Representative of the Chinese Government’s attitude to private cryptocurrencies is the Law of the PRC on the PBoC that aims to prohibit digital currencies including RMB-pegged stablecoins. For a more detailed discussion of this “regulatory foundation” have a look at this ResearchGate article: People's Bank of China (PBOC) lays regulatory foundation for its CBDC.

Mr. Wang points out that in contrast the PBoC manages the e-CNY CBDC on the basis of a centralised operational system. I would add that e-CNY is not built on a blockchain distributed ledger; it is built on a centralised database. Given this the e-CNY is not a cryptocurrency. The entire life cycle of this system as well as the connectivity with other institutions is managed by the PBoC. In terms of the integration of this system with third parties “…. all cross-institutional transactions need to go through the PBOC for the value transfer to occur.” Within this overall architecture the PBoC also manages e-CNY wallets and is also responsible for making and enforcing the rules governing digital wallets.  These “…. wallets are subject to both “centralized management” and “unified cognition.”

By way of an aside, I mentioned above that e-CNY is not built on blockchain technology. Writing about China's Digital Currency and Blockchain network in Stanford University’s Digichina, on March 8, 2022, the authors, Mikk Raud and Eli MacKinnon point out that according to the PBoC, blockchain technology, given the energy and computing requirements needed is not suited to support the projected transaction volumes of the e-CNY and DC/EP.  However, the Chinese government is intent on pursuing the use of blockchain technology via a complimentary project called the Blockchain-based Service Network (BSN). The BSN will provide a “…. global framework for the deployment and operation of a broad range of blockchain applications.”. This framework will offer blockchain developers an effective platform that will enable them to build “next-generation” decentralized applications.

Looking at things from the functional view Mr. Wang points out how the e-CNY consists of two layers in the form of a “hybrid operational system”. The first layer involves the issuance of e-CNY by the PBoC to “second-tier institutions”; the major state-owned banks and internet banks. The second layer is the one in which the banks “circulate the e-CNY to retail market actors including the public.”

Another key module of the e-CNY system is the Digital Wallet. Digital wallets provide a unified user interface (UI) and functionality that is inclusive in design by satisfying different types of user demands. Mr. Wang explains that this consists of three layers.

Regarding the first layer the PBoC sets the underpinning rules governing digital wallets. The second layer consists of the “authorised” operators that offer mobile digital wallet application functionality. The third layer comprises authorised operators working with market stakeholders to develop payment and financial products. The digital RMB residing in these wallets, represent a liability of the PBoC and the banks that offer the wallets provide the interface for the bank customers to access their Digital Currency/Electronic Payment (DC/EP). In turn end users download the PBoC authorised digital wallet application that may be linked to their bank account.

One of the major fear’s libertarians have of CBDCs revolves around what they perceive to be their threat to privacy and anonymity. From the left perspective Mr. Varoufakis had emphasised anonymity as a feature of his Greek digital currency. The Chinese are trying to address this by embedding “managed anonymity” into the e-CNY.

In this regard Mr. Wang points out that when launching their e-CNY wallet application (app) the user’s identity needs to be verified. Once logged in, any transactions performed during that app session will be transmitted with the wallet ID. None of the other parties associated with a transaction will know the identity of the user initiating the transaction. By providing the cover for users to “hide their identity from counterparties” this anonymity makes it hard for online platforms to collect data on the user’s spending habits.

However, the degree to which government inter-agency sharing of e-CNY related data is regulated, was still ill defined when Mr. Wang was writing his 2021 article in the Singapore Law Gazette.

Dr Benjamin Green wrote an article entitled: The e-CNY: Implications for the Future of Digital China This was published by the Australian Institute of International Affairs on the 15^th of March 2023. In his article Dr. Green related how in tandem with a “radical new plan” to develop a “Digital China” the Chinese “….  domestic governance institutions are undergoing changes that include a vision for big data-driven financial oversight.”

Dr. Green begins by placing an economic value on the rapid uptake of mobile and electronic payments systems as a major contribution to the economic growth of China. He informs us that “…. by 2021, China’s digital economy had reached 45.5 trillion yuan, accounting for 39.8 percent of China’s GDP, with digital payments totaling 66 percent of domestic financial transactions in 2019.” Given this, Chinese central authorities are using the e-CNY for “regulatory oversight” achieved through the “data-driven traceability of financial transactions.”

This oversight and traceability are achieved by means of a “….  two-tiered centralised process of issuance (PBOC) and oversight.”  These processes are distributed across a series of data centres which will “ostensibly” be combined and operate under the auspices of the planned regulatory and governance body called the National Data Bureau.

Dr. Green explains that e-CNY managed anonymity functionality applies to withdrawal/deposit transactions in individual digital wallets that are only visible to and monitored by the PBoC. The PBoC is “…. in possession of sole discretionary authority to share that information.”

Existing national corporate and institutional financial reporting requirements within the context of international regulations need to be factored into the discourse revolving around managed anonymity. In this context the need for individual privacy needs to be balanced with the societal need to fight illegal activities. However, Mr. Green provides a word of caution regarding how the regulatory bodies in China will manage to balance the need for traceability and oversight with the need for data privacy on the part of individual e-CNY users.

Mr. Green’s cautionary tone is based on a CNN report entitled China shakes up government to counter financial risks and US tech restrictions, written by Laura He and published on March 8, 2023. Ms. He commented on Chinese government reform “that will shakeup the oversight of its financial system and aims to boost its technological self-reliance, as a tech war with the United States intensifies.” This same report asserts that the one purpose of the shakeup is to consolidate President Xi Jinping’s “…. personal control over government institutions.”

As part of this shakeup Ms. He wrote that a new Chinese department will be tasked with the overseeing and regulation of the increasingly important and growing data repository. “China will also establish a new department to oversee its vast troves of data. The National Data Bureau will be tasked with drafting data-related regulations and coordinating the sharing and utilization of data.”

My understanding of this cautionary note on the part of Mr. Greene is the implication that China’s state centred data governance and regulatory framework will serve the interests of President Xi and the Communist Part of China (CPC). When it comes to China’s data strategy the interests of government in China will always take priority over individuals and business entities.

When viewed through the liberal prism this is threatening. From the socialist perspective of the CPC state centred oversight and traceability is needed to ensure that the control of a CBDC does not fall into, as Mr. Varoufakis bluntly put it in “…. the hands of bankers, central banks’ efforts to boost business end up amplifying inequality.”

In the eyes of those that fear socialism CBDCs provide the means to facilitate the development of socialist economies. CBDCs, such as e-CNY would provide states with the mechanism to exercise greater control over monetary policy as well as the allocation of economic resources. CBDCs could provide the means to radically redistribute wealth through direct transfers, in the form of a Universal Basic Income to citizens, the funding of social programs, the better enforcements of the progressive tax systems and the tacking of tax evasion The role of private banks in this context would be greatly diminished if not eliminated. The other fear that liberal commentators have is the issue of anonymity. With respect to CBDCs the concept of Managed Anonymity would mitigate concerns around the collection, analysis and sharing of user information.

Returning to what Mr. Varoufakis envisaged; a CBDCs would “revolutionise” the ability of central banks to scrutinise and track payments and the operations of the financial system. In this sense, the PBoC has “visibility” into how the e-CNY is used through the acquisition of “big data”. So, unlike private digital currencies, built to “disperse power away from government” (something liberals like about these currencies) the e-CNY centralises state governance over economic activity.

Speaking from the Left side of politics Mr. Varoufakis offered the following prediction and observation about the adoption of CBDC in Capitalist societies:

“Central-bank digital money will happen sooner or later. The great struggle over who will control the payment system and the money tree will continue…. Who controls transactions, interest rates, and money creation controls politics. That’s why the powers-that-be will fight this proposal tooth and nail.”